Can capital market regain investors’ confidence?

After the January 05, 2014 national polls people were assuming that the capital market would start stabilising. However, in reality it did not happen. From January, 2014 to July, 2014 the trend was very disappointing for investors. After Eid-ul Fitr, from the month of August the market has seen some positive trends in trade volume and index. Just when the investors regained their confidence and thinking of a turnaround the market is falling again. Thus the stability of the capital market is a big question. However, the investors, particularly those who already had suffered a huge loss by investing in the capital the market during market collapse in 2011 are really concerned about their future. Moreover, merchant banks, asset management companies and brokerage houses are in trouble with handling portfolios which are incurring huge losses and interest expenses.
The market is still suffering and continues with its bearish trend. Now the question is how long it will continue. The negative equity of portfolios is becoming a headache for all stakeholders. However, Bangladesh Securities and Exchange Commission (BSEC) has taken so many initiatives to make a sustainable capital market. Demutualisation, which separates the trading rights from the ownership and management of exchanges to improve the governance structure of the exchanges, has already been implemented by the Exchange. There are also some other short and long term initiatives as follows:
1. Legal and Regulatory Initiatives
2. Making Rules and Developing Legislation
3. Monitoring and Investigating Market Participants
4. Enforcing Laws and Regulations and
5. Market Development and Promoting Education and Understanding
Previously, weaknesses of the BSEC have prevented it from effective supervision of the markets and intermediaries and have hampered effective enforcement action. A decade-long "brain drain" coupled with the inability to recruit and train new hands have sapped the BSEC's ability to effectively regulate the securities. Furthermore, the prevailing court system, in terms of time required to dispose of the cases, has allowed offenders to delay cases for lengthy periods -- sometimes years, or even decades -- frustrating the BSEC's enforcement efforts. Legal and Regulatory initiatives will rebuild the BSEC's capacity to supervise the capital markets and find a solution to the challenge posed by the lengthy legal process.
Now the question is how to regain the losing confidence of investors or how to attract new potential investors? The answer is very simple: we have to get rid of the volatility of prices and gradually raise the index. If we can make it happen, then obviously the market turnover will grow up and thus boost the investors' confidence. The price volatility shows how active a stock price typically is over a certain period of time. In general, the volatility of a stock return is determined by the fluctuations in the stock index. Fluctuation in the stock index also depends on the demand and supply of securities traded in the stock exchange. The market estimate of volatility can be used as the barometer of the vulnerability of the stock market. Stock return volatility represents the variability of day-to-day stock price changes over a period of time, which is taken as a measure of risks by the relevant agents. High volatility, unaccompanied by any change in the real situation, may lead to a general erosion of investors' confidence in the market and redirect the flow of capital away from the stock market. The excessive level of volatility also reduces the usefulness of stock price as a reflector of the real worth of the listed companies too.
The basic term "capital market" refers to a market for securities such as debt or equity, where business enterprises such as companies and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place in other markets e.g., the money market. So, while investing in capital market, investors need to focus on it on a long term basis. If investors are not looking for long-term investment instead of day-to-day trading then they cannot mitigate the risks of their investment.
Furthermore, the extent of ups and downs in the turnover of capital market mainly depends on economic environment and some other factors such as short term increase in profit in the capital market rather than other economic activities. In the calendar year 1996, the sudden increase in the general index empted the people to invest more in the capital market. Therefore in the FY 1996-97, the turnover increased by 697.81 per cent more than the previous fiscal year. But the game planner (gambler) has achieved the goal and reduced the turnover by 80.71 per cent from that of the previous fiscal year. The turnover increased dramatically from the FY the 2008-09 to the FY 2009-10. During this period the turnover increased about 186.81 per cent from that of the previous fiscal year to Tk. 2563.53 billion (256,353.55 crore). The turnover as well as liquidity of the capital market started to fall in the FY 2010-11. The downward drive of the capital market in 1996 was created by a fake demand mechanism resulting in short-term price volatility in the capital market. In the FY 2010-11, the game plan was different from that in 1996 and the index volatility saw a similar trend for a certain time (about one year) before the downturn of the market. In July 2009 the general index of DSE was 2914.53 while in November 2010 it increased to 8602.44. The percentage change in the general index of the DSE in 2011 suggests a different situation from that of the capital market downturn in 1996, because the market volatility was created long before the nosedive of the capital market in 2011. In November 2009, the general index of DSE increased about 30.22 per cent from the previous month. During the consecutive twelve months the general index rose on an average of 1 to 12 per cent per month. That steady growth of the index that time earned more confidence of the general investors. There was no greater market price volatility. As a result, a trend of greater profits prompted general investors to reinvest their profits along with additional capital. The long-term game planners have again won the game by selling the shares they have collected resulting in an increased supply of shares that pulled down the general index. In December 2010 the general index fell by 3.62 per cent from that of the previous month. In February 2011, it decreased about 30.5 per cent and reached 5203.08. This declining trend of the general index of the DSE continued and finally on November 15, 2011 it dropped to 4645.89. The percentage change of the general index during the downward trend of the capital market in 2011 suggests a long term game plan. By creating an artificial demand and sustaining it for a long time they boosted the confidence of investors. At present the general index (renamed as DSEX) is 4768.90 (as of November 24, 2014). By judging from the past experience in 1996 or in 2010, at present the index is neither very low nor in a bubbling position to collapse. So, there is an ample scope for investors to invest in the market. This statistics can be a good tonic for the investors to regain their confidence.   
How to conquer this situation? : Meanwhile, to build a vibrant capital market all of its stakeholders need to work together. Investors are requested to consider the following facts at the time of making any investment decision:
1. Without acquiring proper knowledge, information and experience regarding different aspects and matters of the capital market, one should not invest there.
2. The gain or loss, whichever comes from the investment, belongs to you. So, well-thought-out of investment decisions based on knowledge and fundamentals of the securities may be the real assistance you need.
3. Don't pay any heed to rumours at the time of trading. It may cause loss to you. Even spreading rumours is legally prohibited.
So always make your investment decisions based on company fundamentals, technical analysis, price level and disclosed information. Avoid rumour-based speculations. At the end of the day it's your money, whatever profit or loss you incur from your investment belongs to you.
In past few years Bangladesh posted a GDP growth of around 6 per cent. If we could achieve a constant GDP growth, then why not it would be possible to attain a positive growth of our capital market which is considered one of the emerging markets in the context of the global financial system. The market has immense potentials for the country's industrialisation, development of infrastructure in particular and economic growth in general. The capital market can play a key part in financing our various industrial sectors as well. In the present scenario, strong capital-base companies are not much keen to come to the market, rather fragile financial companies are interested and getting approval from the BSEC to offload their shares through IPO (initial public offering) by showing higher KPIs (key performance indicators). Later on, under many circumstances we have seen that after offloading of shares the actual KPIs have been much lower than the offered one. As a result, investors became losers and it has a negative impact on our capital market. However, according to the master plan of the BSEC, if an international auditing standard is adopted, then it will result in more transparency in the financial activities and reporting. In that case, these types of fraud and financial indicators' manipulation will come down. This would draw the attention of general investors and give them confidence to invest in the capital market. The BSEC should be more sensible and cautious while giving approval for new IPOs. In the same time the BSEC should drive positively to bring blue chip companies to our capital market by offering attractive tax benefit in liaison with the NBR (National Board of Revenue).
We can also introduce Future and Option Market and help our already existing bond market to be more vibrant. Turnover and market capital of India grew substantially after introducing the option and future market. Although under the master plan for the Capital Market Development by the BSEC it has introduced the derivatives market, it is yet to start and it requires a long time to make it happen. We cannot introduce it, unless we can overcome our lack of professionalism and technical weakness. At the same time, the BSEC should establish a specific regulation relating to these products. We can also welcome hedge funds from different parts of the world to invest in our capital market. However, the investors have to be more sensible and educated properly before implementing the derivatives market in Bangladesh. Online trading would be a great opportunity to ease the process of investment in the Capital Market. Dhaka Stock Exchange, the premier bourse of the country, is yet to start the true online trading. They should immediately start the online trading and facilitate the access of all investors to it. Online trading can attract more investors to invest in the market and thus it can create a positive trend to regain the confidence of investors.
Although we have many mutual funds (MF), performance of the majority mutual of funds is poor and they do not actively participate in the market. In the meantime, many of them are trading at prices below their face value. However, MFs can provide the investors with the opportunity to reduce investment risks which is absent in our market. The regulator should look into this matter and formulate strategies to make them active and play a vital role in boosting investors' confidence.
To sum up, investment is not a hundred metre race. So the investors need to be tolerant and choose the superlative option when investing in the capital market. If one chooses a fundamentally sound company for investment i.e. with good earnings per share (EPS), lower price earning (P/E) and dividend trend, then the probability to lose such investment will be much lower than that from buying shares of a company based on speculations and rumours.
The writer is an Assistant Manager of UniCap Securities Limited  (Subsidiary of Union Capital  Limited).
shahriar@unicap-securities.com